WEBVTT - Surveillance Instant Reaction: The Fed Decides

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<v Speaker 1>This is Bloomberg Surveillance with Tom Keane, Jonathan Farrow, and

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<v Speaker 1>Lisa Abramowitz on Bloomberg Radio.

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<v Speaker 2>We are advantaged by the former Vice Chair of the

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<v Speaker 2>Federal Reserve System, Richard Clarett of Columbian of course, global

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<v Speaker 2>economic advisor at pim Coe, Doctor Clarida, I just want

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<v Speaker 2>to cut to the chase. You wrote an Economist essay

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<v Speaker 2>on about the IMF meeting that I hope everybody at

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<v Speaker 2>the FED read, which is it's really going to be

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<v Speaker 2>hard to get back to a two percent level. Where

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<v Speaker 2>are we heading across the meetings of twenty twenty three

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<v Speaker 2>with the inflation dynamic you describe in your Economist article

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<v Speaker 2>and with what we see from the Fed, where are

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<v Speaker 2>we going to be in June and onto the December meeting.

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<v Speaker 3>Well, thank you for having me on the show, Tom.

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<v Speaker 3>I guess a couple of points. I do think in

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<v Speaker 3>the statement today, as I and I think others expected,

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<v Speaker 3>they did adjust the language, and so they definitely want

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<v Speaker 3>to have the option not to hike at the June

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<v Speaker 3>meeting by including that language on the extent. But I

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<v Speaker 3>do think this is a committee that and we'll see

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<v Speaker 3>this from the chair today. I imagine pretty soon. It's

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<v Speaker 3>don't get emphasized. They're not declaring mission accomplished. Inflation is

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<v Speaker 3>way too high, and certainly this will be I think

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<v Speaker 3>sold and they believe that it's a pause and they're

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<v Speaker 3>going to do what it takes now. Looking ahead, I

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<v Speaker 3>have written and do believe that you under a plausible

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<v Speaker 3>scenario that the FED is laid out in the projections,

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<v Speaker 3>which I broadly agree with, Inflation a year from now

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<v Speaker 3>could be running in the twos, but probably not near

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<v Speaker 3>two point zero, probably north of two and a half,

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<v Speaker 3>maybe closer to three. And I think at that point

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<v Speaker 3>the committee will have to make a judgment. But if

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<v Speaker 3>it sees progress on inflation, then it's shown in the

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<v Speaker 3>SEP projections. They think they can be adjusting rates downward,

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<v Speaker 3>but I don't think they have to get all the

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<v Speaker 3>way to two before you see those adjustments.

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<v Speaker 2>If we look at where we are with our start

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<v Speaker 2>and the calculations that people like you make up to

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<v Speaker 2>see what the path is forward, there are other ways

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<v Speaker 2>within the system to be more restrictive, and of course

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<v Speaker 2>one of them is banking trauma. Are we more super

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<v Speaker 2>restrictive now or more tight than the chairman realizes.

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<v Speaker 3>Well, I well, I'm not sure what the chairman realizes,

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<v Speaker 3>but I do think and I certainly believe that what

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<v Speaker 3>we've seen with SVB, First Republic Credit, Swiss, the kulative

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<v Speaker 3>effect of that, even if there are no more disruptions,

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<v Speaker 3>will be to tighten bank lending. I think that's equivalent

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<v Speaker 3>to some additional rate hikes. So whatever rate hikes you

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<v Speaker 3>might have thought the economy needed, say in late February,

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<v Speaker 3>probably fewer now because this is going to slow the economy.

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<v Speaker 1>You know.

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<v Speaker 3>Toursten, who I really respect, talked about the other markets

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<v Speaker 3>for supplying credit, but a lot of small firms and

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<v Speaker 3>businesses don't have access to those markets. So when bank

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<v Speaker 3>lending slows, it will impact a small business hiring an

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<v Speaker 3>employment I think pretty sally.

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<v Speaker 4>Given that credit interruption. Do you agree with Diane Swank

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<v Speaker 4>and Matt Lazetti earlier who said that they think that

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<v Speaker 4>the bar is higher to cut rates than to raise

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<v Speaker 4>rates again after a pause, Well, let.

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<v Speaker 1>Me think through that.

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<v Speaker 3>I think that inflation's just too damn high. It's not

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<v Speaker 3>three points something, it's in the fours. Whatever progress appeared

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<v Speaker 3>to be evident in the data in the winter has

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<v Speaker 3>now best stalled, and so yes, I think there's a

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<v Speaker 3>committee that is going to be very reluctant to ease

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<v Speaker 3>until it really does start to see inflation moving down sustainably,

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<v Speaker 3>and so I would agree with that.

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<v Speaker 4>So right now, as we look at this statement and

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<v Speaker 4>we understand what you're saying, what more do they have

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<v Speaker 4>to see in the banking sector in order to say, Okay,

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<v Speaker 4>hold up, this is something really serious. It needs a

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<v Speaker 4>little bit more scrutiny.

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<v Speaker 3>Well, I guess, I guess it's an evolving situation. We've

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<v Speaker 3>resolved to significant banks resolved in the sense that they

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<v Speaker 3>they collapsed and they had to be acquired with facilitator

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<v Speaker 3>by the FDIIC.

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<v Speaker 1>Look, let me say what I do.

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<v Speaker 3>Believe the banking system as a whole in the US

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<v Speaker 3>has enough capital, has enough liquidity, and it is profitable.

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<v Speaker 3>So this is not an issue about the banking system

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<v Speaker 3>per se. But clearly there are fragilities amongst certain banks,

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<v Speaker 3>in particular in that category between one hundred to two

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<v Speaker 3>hundred and fifty billion, and we may not have seen

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<v Speaker 3>the last of that.

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<v Speaker 5>If you want to chain again Life on TV and radio.

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<v Speaker 5>This is a special edition of Bloomberg Surveillance covering the

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<v Speaker 5>Federal Reserve decision from about twenty minutes ago, they hiked

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<v Speaker 5>interest rates twenty five basis points. If you're interested in

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<v Speaker 5>the language shift in the statement that we got from

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<v Speaker 5>last time. Last time they said the Committee anticipates that

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<v Speaker 5>some additional policy firming may be appropriate. A couple of

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<v Speaker 5>lines have changed around that. The line now reads in

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<v Speaker 5>determining the extent to which additional policy firming may be

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<v Speaker 5>appropriate to return inflation to two percent over the time,

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<v Speaker 5>the Committee will take into account the cumulative tightening of

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<v Speaker 5>monetary policy. Off the back of this directity market positive

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<v Speaker 5>on the SMP by zero point four percent. That's only

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<v Speaker 5>a P five hundred in the bond market, yields a

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<v Speaker 5>bit lower the front end. Not a big move. That

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<v Speaker 5>move faced just a little bit. We're down about three

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<v Speaker 5>four basis points on a two year three ninety two.

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<v Speaker 5>Just to look at foreign exchange briefly, the euro strongest

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<v Speaker 5>dollar week or off the back of all of this

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<v Speaker 5>one ten sixty five the news conference you're laughing atn't

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<v Speaker 5>you're all ten? He wrote dollar? You love that? Eleven

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<v Speaker 5>minutes away from that news conference. It doesn't seem to change. Rich.

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<v Speaker 5>I keep saying the same thing. Rich, I just want

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<v Speaker 5>to jump in on the banking stress. Your former colleague

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<v Speaker 5>John Williams of the New York Fed has really played

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<v Speaker 5>down the role the FED has played in this by

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<v Speaker 5>hiking interest rates from zero to five so quickly in

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<v Speaker 5>a little more than a year. I'm just wondering what

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<v Speaker 5>your assessment of that is. The contribution of FED policy

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<v Speaker 5>over the last twelve months to what we've seen play

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<v Speaker 5>out at the regional banking level.

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<v Speaker 1>Good question.

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<v Speaker 3>I have anormous regard and work closely with John for

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<v Speaker 3>nearly four years. I think as a FED official, he

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<v Speaker 3>is careful in how he chooses his word.

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<v Speaker 1>I'll just tell you what I think.

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<v Speaker 3>I think in every rate hike cycle, banks that have

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<v Speaker 3>exposure to interest sensative assets are are going to face challenges.

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<v Speaker 3>You know, in the case of First Republic, they held

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<v Speaker 3>a lot of mortgages.

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<v Speaker 1>Mortgages get hurt when the rates go up.

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<v Speaker 3>In the case of SVB, they held a lot of

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<v Speaker 3>you know, securities and so and so. I think banks

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<v Speaker 3>do maturity transformation. They borrow short and lend long, and

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<v Speaker 3>when bond yields go up a lot some banks are

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<v Speaker 3>going to be are going to be challenged, and so

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<v Speaker 3>I just think it's an inevitable part of of monetary policles.

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<v Speaker 3>As I said, the banking system as a whole is sound,

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<v Speaker 3>but banks that have big exposure to rising rates that

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<v Speaker 3>they didn't hedge are not surprisingly going to get hurt.

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<v Speaker 2>And I can ask you this because you're the monetary guy.

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<v Speaker 2>If you're the regulation guy, couldn't ask you this, Doctor Clarida.

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<v Speaker 2>But you know for you it works, and with your

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<v Speaker 2>experience and your public service to the country, it's real simple.

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<v Speaker 2>Everybody's scared stiff. Libors back to where it is. This

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<v Speaker 2>new sofas back to where it is. Kathy Jones over

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<v Speaker 2>at Squab is just out with where the FDTR rate is.

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<v Speaker 2>It's back to where it was, which is six two

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<v Speaker 2>thousand and six. Michael Spence was eloquent in twenty ten

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<v Speaker 2>about the regulatory failures leading into seven eight nine.

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<v Speaker 6>Are we there again? Tom?

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<v Speaker 1>I don't think we're there. I don't believe we're there.

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<v Speaker 3>What I will say is that, and I think the

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<v Speaker 3>report that we got out of the FED and the GAO,

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<v Speaker 3>I certainly read both of them carefully, and clearly there

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<v Speaker 3>were things that were missed. Not so much in regulation,

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<v Speaker 3>but perhaps in supervision. And I do think that we

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<v Speaker 3>will see that changed pretty quickly, and certainly I think

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<v Speaker 3>that would be a good idea.

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<v Speaker 6>Rich.

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<v Speaker 5>You know the Federal Reserve in your time, there has

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<v Speaker 5>been heavily criticized over the last few months regarding this issue.

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<v Speaker 5>Can you share some of your experience in your time?

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<v Speaker 5>Did these issues ever come up at board meetings that

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<v Speaker 5>you attended around the names that have failed over the

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<v Speaker 5>last two months. Were these flanked in any way, shape

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<v Speaker 5>or form at the board level in day c Well.

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<v Speaker 1>Let me just let me just say this.

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<v Speaker 3>I was surprised by both of these based upon my

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<v Speaker 3>entire experience, and in particular, what I would say.

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<v Speaker 1>Is there was a focus.

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<v Speaker 3>It was in statute in twenty eighteen that the FED

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<v Speaker 3>should tailor to the individual banks regulation and supervision. I

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<v Speaker 3>think that that certainly is important, but I think these

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<v Speaker 3>reports do indicate that that needs to be improved, and

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<v Speaker 3>I think it will be improved and it should be improved.

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<v Speaker 4>I guess another way to ask this, Rich is just

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<v Speaker 4>whether this goes all the way up to Jerome Powell

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<v Speaker 4>in terms of his oversight of individual regional bank regulatory exercises.

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<v Speaker 4>In other words, is he somebody who would have known

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<v Speaker 4>some of the granularities here? Just to give us a

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<v Speaker 4>window into what that process is.

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<v Speaker 1>Yeah, I think I'll just leave my answer at that.

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<v Speaker 3>Obviously I've not been in the building for fifteen months,

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<v Speaker 3>and I'll just leave my answer at that.

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<v Speaker 4>All right, Well, just to give you a well, Rich,

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<v Speaker 4>you know, the reason why this is important is because

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<v Speaker 4>people often think of these as independent items. Right, You've

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<v Speaker 4>got on one hand, policy and you definitely have an

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<v Speaker 4>inflation problem. But John, you have to wonder if at

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<v Speaker 4>a certain point you're kind of challenge if you have

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<v Speaker 4>a regulatory.

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<v Speaker 5>Miss mistaken, Rich, I don't think we're going to let

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<v Speaker 5>this go. You were there. You guys knew they were

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<v Speaker 5>hiking aggressively. SVB has gone under signature bank First Republic

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<v Speaker 5>silver Gate when you were hiking interest rates this aggressively

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<v Speaker 5>at the Federal Reserve? Was this on your radar? And Rich?

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<v Speaker 5>If it was on your radar, why was nothing done

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<v Speaker 5>about it in a sufficient way to prevent this from

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<v Speaker 5>ultimately materializing?

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<v Speaker 3>Well, I was there in twenty eighteen when we hiked

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<v Speaker 3>rates up to two and a half percent and paused

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<v Speaker 3>at that level. I continue to say, as I did,

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<v Speaker 3>or when I got a similar question, the banking system

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<v Speaker 3>as a whole is sound. It has a lot of

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<v Speaker 3>capital and liquidity, and so at a top down macroeconomic level,

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<v Speaker 3>it certainly was not then a concern Rich.

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<v Speaker 2>What's so important here to John's question? And I know

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<v Speaker 2>there was a pandemic and all of the estimation of

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<v Speaker 2>the glide path of the great medical miracle of getting

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<v Speaker 2>out of the pandemic, But a lot of cynics would

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<v Speaker 2>be saying that well meaning people have been basically practicing

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<v Speaker 2>modern monetary theory with the Biden stimulus in whatever form

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<v Speaker 2>it was, and now we're trying to extricate ourselves from it.

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<v Speaker 2>How do we extricate ourselves from the FED, the deficit,

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<v Speaker 2>the debt ceiling, the other worries that our listeners and

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<v Speaker 2>viewers have. What does he do in the press conference

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<v Speaker 2>to help us extricate ourselves from his dilemma?

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<v Speaker 1>Well, I think there are a lot of moving parts there.

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<v Speaker 1>I think J.

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<v Speaker 3>Powell is going to focus on doing his job, keeping

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<v Speaker 3>at it till the job is done, but being attuned

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<v Speaker 3>and attentive and sensitive to what we're seeing in the

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<v Speaker 3>financial system. And I don't expect him to move beyond that.

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<v Speaker 3>But Tom, you are right the thrust of your question.

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<v Speaker 3>These are all related and obviously they all impend on

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<v Speaker 3>monetary point.

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<v Speaker 6>This is the heart of the matter.

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<v Speaker 2>From the head of economics at Columbia University for so

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<v Speaker 2>many years and what he did with Gertler, John, this

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<v Speaker 2>is a FED that has to get back to a

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<v Speaker 2>laser focus on what the original mission was through the pandemic.

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<v Speaker 6>There were all these other issues.

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<v Speaker 2>The social the social policy that was you know, it's

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<v Speaker 2>gone off in the crisis.

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<v Speaker 5>Let's be clear that was driven by the chairman himself.

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<v Speaker 6>Yes, I agree, I totally agree.

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<v Speaker 2>But the point is to what the former vice chairman

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<v Speaker 2>is saying, they're going to get back to a more

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<v Speaker 2>focused process.

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<v Speaker 6>That would be one guest.

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<v Speaker 5>Let's focus on the next four minutes. In about four

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<v Speaker 5>minutes time, we will have a news conference with Chairman

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<v Speaker 5>pow Rich. Let's wrap it up there. What would be

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<v Speaker 5>your focus going into this news conference just as a

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<v Speaker 5>spectator now from outside the Federal Reserve looking at this

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<v Speaker 5>play out.

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<v Speaker 1>Well, thank you for that question.

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<v Speaker 3>I do think that the statement today will will will

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<v Speaker 3>be helpful in that because I do think the goal

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<v Speaker 3>coming into the meeting. Notwithstanding, what we saw with First

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<v Speaker 3>Republic was was to give themselves the option to pause

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<v Speaker 3>and uh. But certainly I think the charitable stress that

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<v Speaker 3>they're not it's not mission accomplished, and they've got a.

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<v Speaker 1>Lot of work to do.

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<v Speaker 3>So I think I think we'll hear a fair amount

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<v Speaker 3>of references uh to uh to that, because I think

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<v Speaker 3>he and the committee do want to guard against the

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<v Speaker 3>pause being heard as done, or pause being heard as

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<v Speaker 3>rate cuts are eminent.

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<v Speaker 5>Sounded like a thanks for not asking me about it

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<v Speaker 5>banks again from th Rich than you so much, Chair,

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<v Speaker 5>wonderful to gay perspective on this monastry policy decision.